Question 1

In the equation R = $ \bar{R} $ + U, the three symbols stand for:

Accepted Answer

A) average return, expected return, and unexpected return. 
B) required return, expected return, and unbiased return. 
C) actual total return, expected return, and unexpected return. 
D) required return, expected return, and unbiased risk. 
E) risk, expected return, and unsystematic risk. 
A) average return, expected return, and unexpected return. 
B) required return, expected return, and unbiased return. 
C) actual total return, expected return, and unexpected return. 
D) required return, expected return, and unbiased risk. 
E) risk, expected return, and unsystematic risk. C

Question 2

The single factor APT model that resembles the market model uses _________ as the single factor.

Accepted Answer

A) arbitrage fees 
B) GNP 
C) the inflation rate 
D) the market return 
E) the risk-free return 
A) arbitrage fees 
B) GNP 
C) the inflation rate 
D) the market return 
E) the risk-free return D

Question 3

The unexpected return on a security, U, is made up of:

Accepted Answer

A) market risk and systematic risk. 
B) systematic risk and unsystematic risk. 
C) idiosyncratic risk and unsystematic risk. 
D) expected return and market risk. 
E) expected return and idiosyncratic risk. 
A) market risk and systematic risk. 
B) systematic risk and unsystematic risk. 
C) idiosyncratic risk and unsystematic risk. 
D) expected return and market risk. 
E) expected return and idiosyncratic risk. B

Question 4

What would not be true about a GNP beta?

Accepted Answer

A) If a stock's $\beta$ GNP = 1.5, the stock will experience a 1.5% increase for every 1% surprise increase in GNP. 
B) If a stock's $\beta$ GNP = -1.5, the stock will experience a 1.5% decrease for every 1% surprise increase in GNP. 
C) It is a measure of risk. 
D) It measures the impact of systematic risk associated with GNP. 
E) None of the above. 
A) If a stock's $\beta$ GNP = 1.5, the stock will experience a 1.5% increase for every 1% surprise increase in GNP. 
B) If a stock's $\beta$ GNP = -1.5, the stock will experience a 1.5% decrease for every 1% surprise increase in GNP. 
C) It is a measure of risk. 
D) It measures the impact of systematic risk associated with GNP. 
E) None of the above.

Question 5

Both the APT and the CAPM imply a positive relationship between expected return and risk.The APT views risk:

Accepted Answer

A) very similarly to the CAPM via the beta of the security. 
B) in terms of individual intersecurity correlation versus the beta of the CAPM. 
C) via the industry wide or marketwide factors creating correlation between securities. 
D) as the standardized deviation of the covariance. 
E) None of the above. 
A) very similarly to the CAPM via the beta of the security. 
B) in terms of individual intersecurity correlation versus the beta of the CAPM. 
C) via the industry wide or marketwide factors creating correlation between securities. 
D) as the standardized deviation of the covariance. 
E) None of the above.

Question 6

The most realistic APT model would likely include:

Accepted Answer

A) multiple factors. 
B) only one factor. 
C) a factor to measure inflation. 
D) Both A and C. 
E) Both B and C. 
A) multiple factors. 
B) only one factor. 
C) a factor to measure inflation. 
D) Both A and C. 
E) Both B and C.

Question 7

In normal market conditions if a security has a negative beta:

Accepted Answer

A) the security always has a positive return. 
B) the security has an expected return above the risk-free return. 
C) the security has an expected return less than the risk-free rate. 
D) the security has an expected return equal to the market portfolio. 
E) Both A and B. 
A) the security always has a positive return. 
B) the security has an expected return above the risk-free return. 
C) the security has an expected return less than the risk-free rate. 
D) the security has an expected return equal to the market portfolio. 
E) Both A and B.

Question 8

Calculate the stock's total return if the company announces that they had an industrial accident and the operating facilities will close down for some time thus resulting in a loss by the company of 7% in return.

Accepted Answer

A) -4.05% 
B) -2.05% 
C) 4.55% 
D) 0.40% 
E) 1.85% 
A) -4.05% 
B) -2.05% 
C) 4.55% 
D) 0.40% 
E) 1.85%

Question 9

A security that has a beta of zero will have an expected return of:

Accepted Answer

A) zero. 
B) the market risk premium. 
C) the risk free rate. 
D) less than the risk free rate but not negative. 
E) less than the risk free rate which can be negative. 
A) zero. 
B) the market risk premium. 
C) the risk free rate. 
D) less than the risk free rate but not negative. 
E) less than the risk free rate which can be negative.

Question 10

The acronym APT stands for:

Accepted Answer

A) Arbitrage Pricing Techniques. 
B) Absolute Profit Theory. 
C) Arbitrage Pricing Theory. 
D) Asset Puting Theory. 
E) Assured Price Techniques. 
A) Arbitrage Pricing Techniques. 
B) Absolute Profit Theory. 
C) Arbitrage Pricing Theory. 
D) Asset Puting Theory. 
E) Assured Price Techniques.

Question 11

A company owning gold mines will probably have a _____ inflation beta because an ___ increase in inflation is usually associated with an increase in gold prices.

Accepted Answer

A) negative; anticipated 
B) positive; anticipated 
C) negative; unanticipated 
D) positive; unanticipated 
E) None of the above. 
A) negative; anticipated 
B) positive; anticipated 
C) negative; unanticipated 
D) positive; unanticipated 
E) None of the above.

Question 12

The systematic response coefficient for productivity, $\beta$p, would produce an unexpected change in any security return of __ $\beta$Pif the expected rate of productivity was 1.5% and the actual rate was 2.25%.

Accepted Answer

A) 0.75% 
B) -0.75% 
C) 2.25% 
D) -2.25% 
E) 1.5% 
A) 0.75% 
B) -0.75% 
C) 2.25% 
D) -2.25% 
E) 1.5%

Question 13

If the expected return on the stock is 6%, and no unexpected news concerning the stock surfaces, calculate the stock's total return.

Accepted Answer

A) 2.95% 
B) 4.95% 
C) 6.55% 
D) 7.40% 
E) 8.85% 
A) 2.95% 
B) 4.95% 
C) 6.55% 
D) 7.40% 
E) 8.85%

Question 14

Explain the conceptual differences in the theoretical development of the CAPM and APT.

Accepted Answer

CAPM depends on the efficient set and in

Question 15

Assume that the single factor APT model applies and a portfolio exists such that 2/3 of the funds are invested in Security Q and the rest in the risk-free asset.Security Q has a beta of 1.5.The portfolio has a beta of:

Accepted Answer

A) 0.00 
B) 0.50 
C) 0.75 
D) 1.00 
E) 1.50 
A) 0.00 
B) 0.50 
C) 0.75 
D) 1.00 
E) 1.50

Question 16

Shareholders discount many corporate announcements because of their prior expectations.If an announcement causes the price to change it will mostly be driven by:

Accepted Answer

A) the expected part of the announcement. 
B) market inefficiency. 
C) the unexpected part of the announcement. 
D) the systematic risk. 
E) None of the above. 
A) the expected part of the announcement. 
B) market inefficiency. 
C) the unexpected part of the announcement. 
D) the systematic risk. 
E) None of the above.

Question 17

You have a 3 factor model to explain returns.Explain what a factor represents in the context of the APT? Each factor is multiplied by a beta.What do these represent and how do they relate to the actual return?

Accepted Answer

A factor is a variable that explains som

Question 18

The term Corr($\varepsilon$ R, $\varepsilon$ T) = 0 tells us that:

Accepted Answer

A) all error terms of company R and T are 0. 
B) the unsystematic risk of companies R and T is unrelated or uncorrelated. 
C) the correlation between the returns of companies R and T is -1. 
D) the systematic risk of companies R and T is unrelated. 
E) None of the above. 
A) all error terms of company R and T are 0. 
B) the unsystematic risk of companies R and T is unrelated or uncorrelated. 
C) the correlation between the returns of companies R and T is -1. 
D) the systematic risk of companies R and T is unrelated. 
E) None of the above.

Question 19

In a portfolio of risky assets, the response to a factor, Fi, can be determined by:

Accepted Answer

A) summing the weighted $\beta$i s and multiplying by the factor Fi. 
B) summing the Fi s. 
C) adding the average weighted expected returns. 
D) summing the weighted random errors. 
E) All of the above. 
A) summing the weighted $\beta$i s and multiplying by the factor Fi. 
B) summing the Fi s. 
C) adding the average weighted expected returns. 
D) summing the weighted random errors. 
E) All of the above.

Question 20

A criticism of the CAPM is that it:

Accepted Answer

A) ignores the return on the market portfolio. 
B) ignores the risk-free return. 
C) requires a single measure of systematic risk. 
D) utilizes too many factors. 
E) None of the above. 
A) ignores the return on the market portfolio. 
B) ignores the risk-free return. 
C) requires a single measure of systematic risk. 
D) utilizes too many factors. 
E) None of the above.

Exam 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory

In the equation R = Rˉ \bar{R} Rˉ + U, the three symbols stand for:

The single factor APT model that resembles the market model uses _________ as the single factor.

The unexpected return on a security, U, is made up of:

What would not be true about a GNP beta?

Both the APT and the CAPM imply a positive relationship between expected return and risk.The APT views risk:

The most realistic APT model would likely include:

In normal market conditions if a security has a negative beta:

Calculate the stock's total return if the company announces that they had an industrial accident and the operating facilities will close down for some time thus resulting in a loss by the company of 7% in return.

A security that has a beta of zero will have an expected return of:

The acronym APT stands for:

A company owning gold mines will probably have a _____ inflation beta because an ___ increase in inflation is usually associated with an increase in gold prices.

The systematic response coefficient for productivity, β\betaβ p, would produce an unexpected change in any security return of __ β\betaβ Pif the expected rate of productivity was 1.5% and the actual rate was 2.25%.

If the expected return on the stock is 6%, and no unexpected news concerning the stock surfaces, calculate the stock's total return.

Explain the conceptual differences in the theoretical development of the CAPM and APT.

Assume that the single factor APT model applies and a portfolio exists such that 2/3 of the funds are invested in Security Q and the rest in the risk-free asset.Security Q has a beta of 1.5.The portfolio has a beta of:

Shareholders discount many corporate announcements because of their prior expectations.If an announcement causes the price to change it will mostly be driven by:

You have a 3 factor model to explain returns.Explain what a factor represents in the context of the APT? Each factor is multiplied by a beta.What do these represent and how do they relate to the actual return?

The term Corr( ε\varepsilonε R, ε\varepsilonε T) = 0 tells us that:

In a portfolio of risky assets, the response to a factor, Fi, can be determined by:

A criticism of the CAPM is that it:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Long-Term Planning

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model

Risk, Cost of Capital, and Capital Budgeting

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Issuing Securities to the Public

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

Filters

In the equation R = $\bar{R}$ + U, the three symbols stand for:

A company owning gold mines will probably have a ___ inflation beta because an _ increase in inflation is usually associated with an increase in gold prices.

The systematic response coefficient for productivity, $\beta$ _p, would produce an unexpected change in any security return of __ $\beta$ _Pif the expected rate of productivity was 1.5% and the actual rate was 2.25%.

The term Corr( $\varepsilon$ R, $\varepsilon$ T) = 0 tells us that: